Some companies give shareholders gift cards. Some hand out name-brand rice packages. The Wrigley Company was once known for providing investors free packages of its chewing gum. After watching companies commit to the hassle and expense of shareholder perks, a College of Business finance and real estate researcher asked the obvious question: Why the generosity?
Rob Schonlau’s latest research indicates that companies that provide shareholders gifts may not be doing it solely out of generosity, but also as a means to juice stock prices and facilitate trading in the stock. In research published in the Review of Financial Studies, Schonlau and his coauthors analyzed stock prices of Japanese firms, which are more likely to provide shareholder perks than their American counterparts. They found that following the announcement of new perks firms’ stock prices increased.
“When these perks are announced, there is a detectable change in the stock price, and, on average, in our sample it’s on the order of 2 percent, which is significant,” Schonlau said. “It’s like the equity in your firm is suddenly 2 percent more valuable.”
Along with the increase in value there is an immediate detectable increase in liquidity, a measure of how much of the stock is being traded at any time. This increase in liquidity means that it is relatively easier and more cost effective for small investors to trade in the stock than it was before.
With rewards materializing nearly over night, it’s easy to understand why Japanese firms present tokens of appreciation to their shareholders. Schonlau dug deeper to get a clearer picture on why stocks behave in that manner. His research found the surge in stock prices came down to two things: publicity and its influence on the market.
Capturing casual investors’ interest
Shareholder perk programs tend to reward all shareholders equally, irrespective of the number of shares they own, so an investor with 20 shares in his portfolio usually receives the same perk as an institutional investor with millions of shares in hers. Both can expect to receive the same gift card when the company issues the perks. Because of that, these programs tend to capture the interest of small retail investors and be overlooked by institutional investors.
To grab the public’s attention, firms turn to marketing and announce those plans with a public-relations announcement. These announcements serve not just to notify potential investors that perks will be coming down the line, but also, Schonlau speculates, that company prospects are looking bright.
“It’s signaling that the management is involved. It is reaching out to small shareholders as it signals that the company is well enough off that they can give,” Schonlau said. “As much as anything, I think it’s just a positive signal about the future. It draws small investors’ attention to this company. This is a positive thing because as an investor if I’m making a decision about thousands of possible firms to invest in and a few of these firms are at the forefront of my mind, I’m more likely to invest in them.”
Any top-of-mind positioning a company’s stock receives after the announcement of an upcoming shareholder gift may elevate a stock price temporarily, but Schonlau found share prices stay up, on average, long after the announcement. That crushes the notion that opportunistic investors who are buying stock merely to receive the announced perk drive up the price.
The power of the small investor
As Schonlau and his coauthors investigated, they tied the long-term gains to an increase in a stock’s liquidity, or the amount of shares being traded in any given day. Increased liquidity makes it easier for investors to buy and sell stock, reducing the overhead cost of making trades, which he cites as a direct byproduct of more individual investors purchasing the stock. Rather than focusing on institutional investors such as fund managers, perks programs give attention to small investors to reap the benefits.
Although more than 20 percent of Japanese firms offer some form of shareholder perk, the ones that saw the greatest benefit were those with fewer individual retail investors engaged before the announcement of the perk.
“I think that’s intuitive,” Schonlau said. “If you already connect with retail investors in a positive widespread way, then the perks have limited effect. The upside of this kind of program is limited if you’re at a company that’s already very liquid with a lot of retail investors.”
The attention paid to small, retail investors bucks the conventional focus on the large, institutional investors and the arguments that it is the large investors that always drive the market.
“The decision to offer perks looks deliberate, like the management at some firms are trying to connect in a way with the small investors,” Schonlau said.